Image source: lululemon athletica.
Turnarounds can take a long time to come to fruition, and yoga retailer lululemon athletica (LULU +1.41%) knows all too well how long it can take to repair a damaged reputation. In recent years, Lululemon has worked hard to win customers back following quality-control issues, but coming into its fiscal first-quarter financial report, Lululemon investors still expected declines in the retailer's bottom line. Those fears did indeed come to pass, but the yoga specialist did say that it expects better times ahead for the industry. Let's take a closer look at the latest from Lululemon and whether the company can follow through on its turnaround strategy.
Lululemon sees earnings move downward
Lululemon's fiscal first-quarter results weren't entirely satisfying. Revenue climbed 17% to $495.5 million, which was better than the 15% growth rate that most investors were expecting to see from the company. But net income fell 5% to $45.3 million, and after taking into account an income tax recovery and other one-time issues, adjusted earnings of $0.30 per share was a penny less than the consensus forecast among those following the stock.
Looking more closely at Lululemon's results, the strength that the retailer showed during its holiday quarter let up somewhat. Total comparable sales climbed 6%, suffering a two percentage point headwind from currency impacts. Comparable-store sales, which only includes brick-and-mortar results, were up 3% in dollar terms, and direct-to-consumer sales jumped 17%, helping to lift Lululemon's overall revenue. The revaluation of cash and receivables held in Canada had a substantial impact on operating income, producing net foreign exchange losses of $13.5 million during the quarter.
Lululemon's margin figures again came under pressure. Gross profits jumped at almost the same pace as revenue, limiting the damage to gross margin to just a fraction of a percentage point. However, operating margin fell 4.5 percentage points, and the drop in net income combined with rising sales put profit margin figures under pressure as well.
Nevertheless, Lululemon CEO Laurent Potdevin maintained his optimism. "We finished the quarter with our inventory levels rebalanced and on track to achieve our goals for the year," Potdevin said, and "by continuing to invest in our people and focus on product innovation, we are well on our way to deliver on our five-year plan."
Can Lululemon Athletica keep gaining speed?
Lululemon also expressed its favorable outlook by making increases to its guidance for the full year. The retailer boosted its sales estimates by $10 million to $20 million, with a new range now expected between $2.305 billion to $2.345 billion. However, the $0.03-per-share earnings increase to a range between $2.08 and $2.18 per share only reflected the tax and interest adjustments that the company made during the fiscal first quarter, and comparable sales gains in the mid-single-digit percentage range don't indicate any expectation of acceleration in results going forward.
Moreover, fiscal second-quarter guidance was less than investors had hoped to see. Lululemon believes that it will post net revenue of $505 million to $515 million during the quarter, and earnings will come in between $0.36 and $0.38 per share. Again, mid-single-digit percentage gains in comparable sales won't show a marked improvement over Lululemon's first-quarter figures.
Still, Lululemon has enough confidence that it is continuing to invest in its long-term growth. The retailer opened 11 new stores during the quarter, closing just one and bringing its overall store count to 373 as of May 1. Lululemon now has almost 1.1 million square feet of store space, which includes both its namesake Lululemon stores and the Ivivva Athletica line as well.
Lululemon investors seemed reasonably happy with how the retailer did, as the stock climbed 2% in the opening minutes of trading following the announcement. With the company having overcome so much to get to where it is, Lululemon simply needs to keep working at taking full advantage of its opportunities for growth as long as favorable conditions in the overall industry persist.
